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New York Attorney General is waging war against DraftKings and FanDuel

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The debate could set the stage for other states

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New York Attorney General Eric Schneiderman filed an injunction today against daily fantasy sport sites DraftKings and FanDuel, alleging they constitute online sports wagering and are therefore illegal under state law. The 35-page report is a scathing takedown of the industry, with a point-by-point refutation of the two companies' claims that wagering real money on imaginary sporting outcomes is not actually gambling.

A court date to decide the legality of daily fantasy sports in New York is set for November 25th. But Schneiderman's office has already used cease-and-desist letters to begin freezing DraftKings' and FanDuel's ability to do business in the state by pressuring their payments processors. A judge yesterday denied both companies' requests for a temporary restraining order to continue operating, and FanDuels today temporarily halted entries in paid contests from New York residents. Both companies control around 90 percent of the multi-billion dollar market.

The legal battle in New York could set the stage for other states

Scheiderman's argument rests on the notion that wagering money on outcomes players have no control over, such as sports games, has been outlawed in New York since 1894. Schneiderman writes:

Like any sports wager, a DFS [daily fantasy sports] wager depends on a "future contingent event" wholly outside the control or influence of any bettor: the real-game performance of athletes. A bettor can try to guess how athletes might perform, but no bettor — no matter how shrewd or sophisticated — can control or influence whether those athletes will succeed. The moment a DFS player submits a wager, he becomes a spectator whose fate is sealed by the real-game performance of athletes.

The ongoing legal battle in New York — which hosts the highest number of daily fantasy players at 12.8 percent — is critical to the future of the market. Daily fantasy sports has emerged in the last few years as a colossal money-making machine that some regulators say is no different than online poker. DraftKings and FanDuel say that fantasy sports is a predominantly skill-based activity, and therefore exempt under the Unlawful Internet Gambling Enforcement Act of 2006. That small loophole has allowed the two companies to turn what was once a season-long activity you'd participate in with office co-workers into an accelerated and gambling-like activity. Seasons are compressed down into a matter of days, with betting happening at high speeds and for massive payouts.

The industry earned the attention of news organizations and lawmakers this October, when an employee of DraftKings appeared to have used information from his company to win $350,000 on FanDuel. No wrongdoing was actually discovered, but a number of investigations were opened, including from the FBI and the Department of Justice, to look into the lack of regulatory oversight. Nevada was the first to challenge DraftKings and FanDuel, though both sites can now obtain gaming licenses to operate, as sports wagering is legal and regulated in the state.

Gambling combines both skill and chance

Schneiderman acknowledges that gambling can combine both skill and chance, as evidence of games like poker and blackjack. However, "the key factor establishing a game of skill is not the presence of skill, but the absence of a material element of chance," he writes. "Here, chance plays just as much of a role (if not more) than it does in games like poker and blackjack. A few good players in a poker tournament may rise to the top based on their skill; but the game is still gambling. So is DFS." Schneiderman also pointed to lottery-like ads — "the simplest way of winning life-changing piles of cash" — and the fact that both companies compare themselves as gambling businesses when pitching themselves to investors.

Schneiderman also points out the distinct harm daily fantasy sports are causing New York residents who collectively dropped $25 million on DraftKings in 2014 alone. "Problem gamblers are increasingly being seen at Gamblers Anonymous meetings and at counselors’ offices addicted to DFS," he writes. Records show that the company's customer service lines also routinely field pleas from gambling addicts requesting their accounts be shut off, the injunction reads.

If these arguments sound familiar, it's because HBO host John Oliver made many of the same points on Last Week Tonight. The segment, at more than 19 minutes in length, details many of the same concerns and highlights flaws in DraftKings' and FanDuel's logic. The video has received more than 1.6 million views on YouTube.

DraftKings and FanDuel have been quick to defend their businesses. Because they are not technically structured like casinos — betting against players in some respects and vacuuming up their losses — the platforms act more like large-scale office betting pools, daily fantasy sports advocates say.

Advocates also point out that DraftKings and FanDuel just collect entry fees and the odds only change based upon the real-world performance of athletes. Both companies cite a McKinsey & Company study this year highlighting that 91 percent of winnings going to 1.3 percent of players as evidence that the game must be skill-based. If it were entirely up to chance, the winnings would be more spread out, the logic goes.

91 percent of winnings go to 1.3 percent of players

"We maintain, unequivocally, that FanDuel has always complied with state and federal law. We look forward to vindicating our position in court next week," FanDuel said in a statement. "We will press on and fight to ensure that your right to play fantasy sports is protected, not just in New York, but across the nation." DraftKings similarly believes "the attorney general’s view of this issue is based on an incomplete understanding of the facts about how our business operates and a fundamental misinterpretation and misapplication of the law."

Schneiderman says the application of skill is no different in daily fantasy sports than in poker or blackjack, where a small percentage of players "use research, software, and large bankrolls to extract a disproportionate share" of the winnings. Ultimately, the legality of DraftKings and FanDuel will boil down to the interpretation of New York state law and whether the local government has the authority to determine what residents can and cannot spend money on.

Correction: The original version of this story said a member of FanDuel was thought to have used internal company information to win $350,000 on DraftKings. It was in fact a DraftKings employee who won that sum on FanDuel. We regret the error.